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Cisco's Sales Will Drop as Much as 17%, Chambers Says

August 6, 2009 | Chris Payatagool

Cisco-logo.gifAug. 5  -- Cisco Systems Inc., the largest maker of networking equipment, predicted that revenue will drop for a fourth straight quarter as the recession crimps orders of networking equipment.

Revenue will fall 15 percent to 17 percent in the fiscal first quarter, which ends in October, the company said today. That equates to between about $8.6 billion and $8.8 billion, down from $10.4 billion a year earlier.

Global sales of routers and switches, which account for almost half of Cisco's sales, will fall about 20 percent this year, according to the research firm Dell'Oro Group. Chief Executive Officer John Chambers aims to revive growth by getting into markets such as video cameras and computer servers.

"It's disturbing in the fact that you'd like to see them gaining momentum," said Cisco investor Daniel Morgan, a portfolio manager for Synovus Securities Inc. in Atlanta. "But then you have to take a step back and realize what's going on in the industry."

Cisco, based in San Jose, California, fell 74 cents to $21.43 in late trading after giving the forecast. The shares, up 36 percent this year, closed at $22.17 today on the Nasdaq Stock Market.

Profit Margin

The company's gross margin -- the percentage of sales remaining after production costs -- will be 64 percent this quarter, Cisco said. That compares with 65.3 percent last quarter. Less-profitable consumer products could be taking a toll, said Mark Demos, portfolio manager for Fifth Third Asset Management in Minneapolis.

"The big issue is profitability," said Demos, who helps manage $19.8 billion in assets. His firm had about 3 million shares of Cisco as of March 31. "They're saying there could be an issue because of a mix of products."

Orders began to rebound in the fourth quarter, though it's too early to tell if the recovery will last, Chambers, 59, said on a conference call.

Sales in the fourth quarter were typical for the season, unlike the previous three quarters, he said. "While it's too soon to call a recovery, it's the first positive trend we've seen," Chambers said.

Fourth Quarter

Fourth-quarter net income fell 46 percent to $1.08 billion, or 19 cents a share, from $2.01 billion, or 33 cents, a year earlier, Cisco said today. Excluding costs such as stock compensation, profit was 31 cents. Analysts in a Bloomberg survey had estimated 29 cents on average.

Revenue fell 18 percent to $8.54 billion in the quarter, which ended July 25. Analysts had projected $8.51 billion.

To cope with the slump, Cisco just completed more than $1.5 billion in budget cuts. It eliminated more than 2,000 jobs, curtailed hiring and merged offices. Cisco had $35 billion in cash and equivalents at the end of last quarter, up from $26.2 billion a year earlier.

Investors view Cisco as a technology-industry bellwether because it dominates the market for routers and switches, products that direct the flow of data. Large companies account for most sales of switches, used to run their corporate networks. Phone carriers and Internet-service providers mostly purchase routers, which are costlier.

Economic Bellwether

Cisco's results also serve as an indicator of the broader economy, said Jason Ader, an analyst with William Blair & Co. in Boston. He expects the shares to perform in line with the market and doesn't own them.

"Switch sales are typically correlated with economic factors such as employment, new business starts and business expansion," Ader said.

The U.S. economy shrank 1 percent last quarter, extending the longest recession since World War II. The country has lost 6.5 million jobs since the slump began in December 2007. Economists surveyed by Bloomberg forecast the jobless rate to exceed 10 percent by early 2010.

Cisco set out last year to cut at least $1 billion in annual costs by July. Cisco reduced travel expenses by using its own videoconferencing equipment to avoid business trips.

To contact the reporter on this story: Rochelle Garner in San Francisco at [email protected] 

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